Acorn International, Inc. (NYSE:ATV) Q4 2018 Results Earnings Conference Call March 7, 2019 8:30 AM ET
Elaine Ketchmere – Compass Investor Relations, IR
Jacob Fisch – President and CEO
Martin Key – CFO
Conference Call Participants
Richard Greulich – REG Capital Advisors
Good day and welcome to the Acorn International Q4 Earnings Conference Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference to Ms. Elaine Ketchmere. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us today for the discussion of our unaudited financial results for the fourth quarter of 2018. With me today are Mr. Jacob Fisch, our CEO and President; and Mr. Martin Key, our Acting CFO. After our prepared remarks, we will open the line for questions.
Before we continue, I’d like to remind you that the discussion today will contain certain forward-looking statements. These forward-looking statements include among others, statements with respect to the company’s belief it will continue to maintain positive income from continuing operation for the year 2019, the company’s ability to maintain healthy margins, manage expenses and generate additional cash flow. And the expectation that the company’s focus on new media in China along with further expansion on additional B2C e-commerce platforms will continue to drive e-commerce sales in the future.
A number of the potential inherent risks and uncertainties that Acorn’s business involves are outlined in the company’s public filings with the US Securities and Exchange Commission. As such, actual results may be materially different from the views expressed or anticipated results described today. Acorn International does not undertake any obligation to update any forward-looking statement, except as required by applicable law.
Furthermore, the unaudited financial information discussed today is preliminary and subject to potential adjustments. Adjustments maybe identified when audit work has been performed for the company’s year-end audit, which could result in significant differences from this preliminary unaudited financial information.
Now, I will turn the call over to Jacob Fisch, Acorn’s CEO and President, who will discuss some operational highlights for the quarter. Jake?
Great. Thank you, Elaine. And thank you everyone and welcome to the call. Year 2018 was a successful one for both — for Acorn both financially and strategically. Throughout the year, we leveraged our 20 year history as a leading marketing and branding company in China to focus on new media in China while simultaneously expanding our e-commerce B2C platforms and promoting our products through digital media in China.
By successfully implementing this strategy, we achieved profitability at the operating level for the full year for the first time in recent history. Revenue growth of 40.2% combined with strong gross margin and significant operating leverage led to income from continuing operations of $2.9 million in 2018, up from a loss of continuing operations of $4.2 million in 2017. Net income attributable to Acorn for 2018 was $29.1 million including a one-time gain of $30 million from the sale of non-core assets in May 2018.
We closed this year with solid performance in the fourth quarter. Our legacy Babaka brand of posture correction products continued to perform well and new product category Acorn Fresh, which sells premium imported food items to Chinese consumers, saw monthly net revenue more than double from October to December. We recently began promoting a popular line of collectibles which were historically sold offline via our digital content business Acorn Streaming, in an effort to further drive online sales.
Acorn Entertainment our social media business that helps Western sports and entertainment talent and a diverse range of brands develop a deep and meaningful impact in the Chinese market continued to add clients to its roster, including fashion brands, Jay Godfrey and Go FO as well as sustainable urban forestry firm Trella Urban Forestry Technologies.
In the year ahead, we plan to build our success — build on our success in 2018 by focusing on growing e-commerce sales via streaming content as we tap into this large and growing market in China. We also seek to drive further revenue from Acorn Entertainment as well as Acorn Streaming which is primarily focused on live streaming and pre-recorded video content creation and distribution.
Now, I’ll turn the call over to our acting CFO, Martin Key, who will discuss our financial results in more detail.
Thank you, Jake. For Acorn in the fourth quarter of 2018 total revenues were US$8.4 million up 65.7% from US$5.1 million in the fourth quarter 2017 which was primarily due to an increase in e-commerce sales of Babaka branded products as well as other products.
Gross profit in the fourth quarter of 2018 was US$5.9 million up to 65.8% from US$3.5 million in the fourth quarter of 2017. Gross Margin was 69.8% in the fourth quarter of 2018 which is unchanged from the fourth quarter of 2017.
Total operating expenses in the fourth quarter of 2018 were US$4.1 million down 9.3% from US$4.6 million in the fourth quarter of 2017, which was due primarily to lower general and administrative expenses, which were partially offset by an increase in selling and marketing expenses to support the e-commerce sales.
Income from continuing operations was US$1.7 million in the fourth quarter of 2018 as compared to a loss from continuing operations of US$1 million in the fourth quarter of 2017.
Income tax expense was US$0.3 million in the fourth quarter of 2018. This compares to an income tax benefit of US$9.6 million in the fourth quarter 2017 which was due to the recording of a tax asset at US$8 million from deductible loss and at US$1.6 million write-down of previously accrued income tax expenses based on the full year financial performance.
Net income from continuing operations was US$1.4 million in the fourth quarter of 2018. This compares to net income from continuing operations of US$8.7 million in the fourth quarter 2017, which was primarily due to the previously mentioned income tax benefit realized in 2017.
Net income from discontinued operations, which reflects the sale of a majority stake in the HJX electronic learning products business to a third-party investor and operator in 2017, was US$0.2 million in the fourth quarter of 2018, compared to a net loss from discontinued operations of US$1.2 million in the fourth quarter of 2017.
Net income attributable to Acorn was US$1.6 million in the fourth quarter of 2018. This compares to net income attributable to Acorn of US$7.5 million in the fourth quarter of 2017, which was primarily due to the previously mentioned tax benefit realized in 2017.
During the fourth quarter of 2018, the company repurchased 14,615 ADSs at an average price of US$20.56 per ADS under the share repurchase program, which was approved by the Board of Directors on December 8, 2017.
Now to the full year financial results.
Total net revenues were US$28.4 million in 2018, up 40.2% from US$20.3 million in 2017. This was primarily due to an increase in e-commerce sales of Babaka branded products as well as other products.
Gross profit in 2018 was US$20.2 million, up 42.3% from US$14.2 million in 2017. Gross margin was 71.1% in 2018, up from 70.1% in 2017. The slight increase in gross margin was due to a larger proportion of higher margin products in the product mix.
Total operating expenses in 2018 were US$17.4 million, which is down 5.7% from operating expenses of US$18.4 million in 2017, due primarily to lower general and administrative expenses and an increase in other operating income from loan interest income and net revenue from Acorn Entertainment, which were partially offset by an increase in selling and marketing expenses to support e-commerce.
Income from continuing operations was US$2.9 million in 2018, as compared to a loss from continuing operations of US$4.2 million in 2017.
Other income was US$30 million in 2018, primarily due to a gain on the sale of non-core assets, as compared to other income of US$11.6 million in 2017, which was primarily due to dividends and gains from sales of shares of E-Money Holding Co., Ltd. formerly known as Yimeng Software Technology Co., Ltd., which is a publicly traded company in China.
Income tax expense was $3 million in 2018. This compares to an income tax benefit of $7.9 million in 2017, which was primarily due to the previously mentioned income tax benefit realized in 2017.
Net income from continuing operations was US$30.3 million in 2018, compared to a net income from continuing operations of US$15.9 million in 2017.
Net loss from discontinued operations was US$1.2 million in 2018, compared to net loss from discontinued operations of US$3.5 million in 2017.
Net income attributable to Acorn was US$29.1 million in 2018 as compared to net income attributable to Acorn of US$12.4 million in 2017. Net income for 2018 includes the one-time gain of US$30 million from the sale of non-core assets, while net income for 2017 includes the one-time gain of US$11.8 million due to dividends received and gains from the sales of E-Money shares, along with an income tax benefit of US$9.6 million in the fourth quarter of 2017.
As of December 31, 2018, Acorn’s cash and cash equivalents, with restricted cash, totaled US$20.1 million. And the cash balance at the end of 2018 reflects the payment of a special cash dividend of approximately US$40 million in June 2018. Cash and equivalents, with restricted cash, totaled US$21.1 million as of December 31, 2017.
On December 10, 2018, we executed an agreement to sell Acorn’s former principal office in Shanghai to a third-party for US$6.7 million and received the initial payment of US$5.1 million on December 24, 2018.
In addition to a tax asset of US$8.2 million on the balance sheet that is already netted against deferred tax liabilities as of December 31, 2018, Acorn also has an aggregate net deductible loss of approximately US$33.4 million expiring within the next five years, which we will strive to utilize for our benefit going forward.
Now I will turn the call back over Jake for some closing remarks.
Thank you, Martin. In closing, our strong performance in 2018 speaks the Acorn’s success in leveraging our 20 years of direct marketing expertise in China to connect with Chinese consumers via new media channels such as streaming and pay-to-view content to introduce successful new businesses such as Acorn Fresh and Acorn Entertainment and expand our B2C e-commerce channel to drive revenue growth. We plan to build on this momentum in 2019. We thank you for your continued support of Acorn.
That concludes the prepared remarks section of this call. And now we will open the call for questions. And I’ll turn it back to the operator.
Thank you, sir. [Operator Instructions]. Our first question is coming from Richard Greulich with REG Capital Advisors. Please go ahead.
Thank you for making the call. Congratulations on a terrific year and actually terrific last two years now. I have a couple of questions. The headquarter office sale, what was the book value period end. So would there be a gain or loss in that transaction?
There is a — I don’t know if we have the book value number in front of us. We have to get back to you. So there is some tax associated with that but we’d have to share that with you separately.
Okay, there’s a slight gain on that, okay. And I was trying to figure out where on the balance sheet that asset would have been listed, it seems like it was — was that under PP&E?
Yes. It was under PP&E.
The loan to related parties now is up to $10 million. Is there a limit or a target level which you would kind of cap that off at?
It is newly extended. So it’s likely to go up to — it could go up to $15 million.
Okay. And is that personally guaranteed by Mr. Roche?
No I’d have to get back to you on the details of the loan. I can’t remember frankly off hand what aspects of it were put in the disclosure. I believe it is going to be an appendix to the 20-F or maybe — it probably was an appendix last year to the 20-F. And then therefore, it would be again this year if indeed it was last year, and I need to have the auditors tell me whether it needs to go in or not and if it didn’t, it will have all of the — it will have all the components attached to it, I imagine.
Yes, I just vaguely remember when it first started, I thought it was but okay, I’ll go back and check. Is there any strategy or any move afoot to expand the Babaka brand to other or related products?
The answer is, yes. We are I would say as an overall strategy looking to continue to grow that brand and we are looking at product extensions and new product introduces. This is something that we have been doing consistently over time but I would say you’re on the right track, we’re putting more energy and focus into building out the product categories.
And is there any move afoot to expand any sales in the United States? I think I’ve seen some or maybe I looked at websites but do you sell in the United States that brand at this point?
We don’t. We are a household name in China. We have such strong brand recognition. It’s such a I’d say powerful name brand for us to try to build something like that outside of home market. It would take cost and different analysis. We don’t see that we would likely do that. I mean our business is very much China-focused. That said, if something were to arise opportunistically, we would take a look at it. There are competitive products on the market in the US and elsewhere. So I would say really short-term, it’s pretty unlikely we would enter the US market with that brand.
To an outside observer, what you’re doing is interesting and some of your other moves, but we — I just have no idea when it’s going to be enough to move a needle in terms of revenues? Could you kind of look forward over the next couple years and maybe point to which ones are going to likely to be more significant than others?
It’s — I would say the whole ecosystem that we’re developing, I think will move in step. So, I think we’re excited about the momentum of Acorn Fresh, however, on an absolute basis it’s still small, but it’s growing very well. And I think there’s great demand in the market in China among consumers to upgrade despite the headlines that are fairly negative about China and general trepidation were here on the ground and there is a demand for higher quality food products in particular safe food. And we think we’re right in the middle of that. So we’re quite pleased about what’s happened so far in terms of the financial impact. We need to say let’s wait and see and — but we are very enthusiastic about that brand in particular and frankly the type of the business that we’re in process of growing.
Now is it correct that there were no sales of Yimeng technology or Yimeng software shares during the quarter?
That’s correct, yes.
Okay. And with the Chinese market — stock market having gone down and then back up, has that affected much in terms of the way of where that — those shares are being quoted at this point if not traded?
I don’t think so. I mean, you may — so the shares price on the OTC platform went down quite a bit, I think starting about a year ago and that was driven maybe in part by the general overall direction of the Asia market but also more significantly by issues around that particular platform. I think we’ve reported previously that our view that it’s — the market on which those shares are traded is a very illiquid market and almost shouldn’t be regarded as a public market because of the illiquidity as we understand that. And I mean I suppose another factor to your question, to your point, our understanding of the Yimeng business is that it is a stock trading business, and therefore, somewhat affected in terms of its overall performance by the overall market condition.
So there are — I would say there’s some influence. I think some of it is very specific to how those shares are traded, the way they’re listed in the market itself, it’s unclear whether the market price that is listed on the OTC is indicative — or is completely indicative of the fair value of the company but, we’ll let the auditors basically tell us what that amount is and that’s what we’ve done in the past and that’s what’s reflected on the balance sheet basically. We go through the process of conducting evaluation and then the auditors work with the valuers and arrive at the value on balance sheet.
Well the $42 million that’s shown on the preliminary balance sheet at the end of 2018, is this after the auditors have already taken a look at those valuation assessments?
Not — they — this has not been audited, let’s put it that way, the 20-F was published at the end of the last year or so. If you’re asking if there was renewed — that — I guess that’s the answer.
Okay. And just I’m not sure, but in the past, when — have there been any major changes in the past from the unaudited preliminary balance sheet numbers to the final audited numbers at the end of the year for evaluations like this for you?
Sorry, you mean, for — you’re talking about Yimeng or you’re talking about the overall balance sheet?
Well for Yimeng’s value on the Acorn balance sheet. When you have a preliminary balance sheet, has there been any significant changes over the past couple of years between the first preliminary balance sheet and the final audited ones?
I’d have to ask you to go back and look at that. I don’t recall off them. I don’t — candidly I don’t recall there being one, but that doesn’t mean that I’m incorrect and there wasn’t one.
Okay. And lastly in the past, you generally have not had a first quarter financial release and just wait until the mid-year to begin your quarterly. Do you plan on doing that again this year and I would encourage you to have a first quarter release?
We’re intending that first quarter release. We are.
Thank you very much for your time. Appreciate it.
Thank you. Thank you very much.
Thank you. [Operator Instructions] And with no further questions, we will move to conclude today’s conference. Thank you all for your attention. All parties may now disconnect.